Yes, we are able to, but we didn't - so if you really want it changed, you'll have to go through the effort of doing so

Jeff, you also forgot Load.php specifically the LoadCookie and possibly LoadUserSettings functions.
Before you ask WHY we didn't pull the encryption out, there are 2 reasons.
a) this was a port from y1G and the excryption was forced in - it was not a planned feature, so we did what worked
b) encryption based on a substr($paswd,0,2) seed is as standard a password excryption algorithm as you're going to get. That particular seed was selected to make it as easy as possible for developers to make their projects mesh with SE as easily as possible.